Technical Studies Indicate Possible Bottom and Support for Gold - Part 3

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On Monday, November 11th, we first spoke about different technical indicators used to mathematically quantify market sentiment. We first spoke about one of the most widely accepted technical indicators which is used to identify current market sentiment; a simple moving average. While the 50-day moving average is used to identify the most current and short-term trend in a market, it is the 200-day moving average which is most highly used to look at the long-term trend of a stock or commodity.

We then used a technical study most commonly referred to as Fibonacci retracement theory to identify the likely possibility that gold prices which have been trending lower could in fact be close to a potential bottom and price support. The key difference between technical studies which use any variation of a moving average, and a technical study based upon Fibonacci theory is whereas the moving average is a lagging indicator, while retracement theory is one of the few leading indicators. By that we are referring to the fact that a moving average defines where a market has been by looking back and creating an average price over time, whereas retracement theory uses two price points to look forward and predict upcoming levels of support and resistance.

According to Investopedia, “A Fibonacci retracement is a term used in technical analysis that refers to areas of support or resistance. Fibonacci retracement levels use horizontal lines to indicate where possible support and resistance levels are. Each level is associated with a percentage. The percentage is how much of a prior move the price has retraced. The Fibonacci retracement levels are 23.6%, 38.2%, 61.8% and 78.6%. While not officially a Fibonacci ratio, 50% is also used.” In the case of gold, on Monday, our research indicated that we might be looking at price support at approximately $11 below current pricing. Gold was trading at $1457, and had been in a defined downtrend since the first week of September when prices reached approximately $1565, the highest value of the year.

We looked at a Fibonacci retracement based upon the low achieved at the end of 2015 (beginning of 2016), when after a multiyear correction gold hit a low of $1045, and the highest value gold had reached since that low which was $1565. The first retracement level of interest was the .23% Fibonacci retracement level which occurs at $1446. Given that gold had declined $100 since hitting the yearly high, the .23% retracement level was a logical place where we could in fact find price support. Yesterday we identified the fact that on an intraday basis gold came within $0.10 of that Fibonacci retracement level, trading to a low of $1446.20, before recovering.

Today gold futures spiked higher and as of 4 PM EST are currently trading up $10.70 and fixed at $1464.30, almost $20 above the .23% Fibonacci retracement level. While it is an accepted fact that fundamental events shaped recent price changes in gold, the use of Fibonacci retracement theory gave market technicians insight and defined a price point that could be where the current correction in gold might conclude.

Wishing you as always, good trading,

Gary S. Wagner - Executive Producer